Following up on the Neil Garfield radio show last night, Bill Paatalo asked: “So here’s the million-dollar question. If the investors who put up the money to either fund the loans or purchase the “underlying” assets have no recourse to go after the collateral, who does?”
The current answer is nobody, which is nearly impossible to wrap your head around. But the future answer lies in either well-informed court doctrine or new legislation (or both) that will clear the obvious bungled title issues and the obvious wrongful and fraudulent foreclosures conducted over the last decade or more.
In my opinion, the convoluted securitization scheme has resulted in multiple inequities to practically everyone involved other than the perpetrators. If we accept the premise of an intention to produce justice and equity then only a court of equity can declare the rights of the parties, enjoin parties from asserting nonexistent rights, and order disgorgement of windfall profits from illegal activities. Until then the title mess and the gross inequity to American homeowners and the ongoing cost to American taxpayers will only get worse.
My analysis is below.
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THIS ARTICLE IS NOT A LEGAL OPINION UPON WHICH YOU CAN RELY IN ANY INDIVIDUAL CASE. HIRE A LAWYER.
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PART I – FROM THE BOTTOM UP
1. Borrower gets money.
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2. Borrower promises to pay it back
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3. Borrower agrees to use the house as collateral
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4. Borrower is directed to pay servicer
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5. Borrower pays servicer
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6. Servicer pays TPS (Third Party Stranger) — the borrower’s original promise to pay has been converted into a flow of money that never reaches the named “lender”, creditor or owner of the debt.
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7. The two indispensable parties recognizable in the single transaction doctrine or the step transaction doctrine — the investor/lender and the borrower/homeowner — are separated on paper but not separated in equity.
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PART II FROM THE TOP DOWN
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1. Investor pays for certificates issued in the name of a nonexistent Trust. Ergo the trust name is a fictitious name being used by the underwriter of the certificates. These are called “mortgage bonds”
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2. The indenture of the certificates bars the investor from even asking about the trust assets or status, and also bars the named Trustee from asking about the assets or status. Neither the named Trustee nor the investor has any present or even conditional right to assert title or interest in any assets.
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3. The holder of the certificate gets a promise from the underwriter of the certificates who is operating under the fictitious name of the nonexistent trust.
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4. Reading the prospectus and the PSA it is apparent that the promise consists of a only a conditional forecast of payments from the underwriter of the certificates that are NOT based upon the payments or even the schedule of payments from any one mortgage or any group of mortgage loans. In most instances, the MLS (Mortgage Loan Schedule) attached to the prospectus is disclaimed by the prospectus as for example only and does not represent anything owned by the trust.
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5. The forecast does not guarantee any payment to the investors. Payment to investors are within the sole discretion of the underwriter who usually appears as Master Servicer or who controls the named Master Servicer of the nonexistent assets of the nonexistent trust.
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6. Upon default in payments investors have no remedy. They have waived all right, title and interest to the debts, notes, mortgages or other assets of the nonexistent trust. Combined with the other terms this means that the certificates were neither mortgage-backed nor bonds.
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7. Since the investor’s only expectation of payment is from the underwriter doing business in the name of the nonexistent trust the investor has no standing to assert any rights in the nominal trust arrangement. Nor does the investor have any right to claim, collect, receive or otherwise enforce the debt, note or mortgage.
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8. Investors are not beneficiaries under the trust instrument (PSA). There are no beneficiaries.
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9. Named Trustees have no trustee powers under the trust instrument. Neither do the servicers or anyone else. There is no trustee.
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10. There is no Trustor/Settlor who owned assets (loans) and conveyed them to the Trustee to hold and actively manage for the benefit of nonexistent beneficiaries. There is no res, which is latin for “the thing” that is entrusted to a trustee to hold in trust to own and actively manage the assets for the benefit of beneficiaries.
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11. There is no transaction where anyone acting in the name of the nonexistent trust acquired ownership of the debts, notes or mortgages. There is no trust.
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12. The parties named in most foreclosures as claimants do not exist or do not exist in the role that is implied. Nor do they represent the equitable owners of the debt. They are acting purely out of self interest without regard to either the investors or the homeowners. They are intermediaries who used complexity to create the illusion of ownership or representation of ownership where none existed.
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Part III — Putting It All together
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1. The homeowner’s debt was converted either at origination or immediately following origination from a promise to pay the creditor who funded them into a promise to pay as instructed to a servicer, who neither loaned money nor purchased the the debt, note or mortgage.
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2. The conversion consisted of changing the borrower’s promise to pay to the underwriter’s promise to pay.
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3. At that point the debt became separated from the paperwork. That means that the debt is still owed to the party whose money funded the transaction, but that party is not mentioned anywhere on the borrower’s paperwork and does not have any direct or indirect rights to the debt, note or mortgage.
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4. The mortgage, while potentially enforceable with extrinsic (parole) evidence is unenforceable but not necessarily extinguished.
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5. The note is merely evidence of a debt and the agreement of the borrower to repay according to the terms set forth on the note.
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6. Both the note and mortgage are either fatally defective or unenforceable because neither one is attached to the debt which is payable and paid to servicers who do not represent the investors who funded the loan.
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7. The servicers are paying the underwriters who may or may not make good on their promise to pay the investors according to a schedule that is entirely different than the one set forth on any purported mortgage loan.
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8. In the same way that borrowers do not have standing to assert any claim based on anything in the trust instrument (PSA) or prospectus, the investors are also barred (lack of standing) and if it came to it, the named Trustees of the nonexistent Trust would also be barred (lack of standing).
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Hence the answer to the obvious question is that there is no party who is legally entitled to claim a right to be in correspondence with, or collect from borrowers, much less to enforce a debt or foreclose on a home. Eventually the courts will come to realize that they were duped by complexity and undeserved reliance on the representations of the banks.
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It is only in a court of equity that modification and new terms can be fashioned to reflect the original intent of the borrower and the original intent of the investor under reasonable terms that both can live with. I do not predict when this will happen but only that such a “fix” is indispensable for the economic health of the nation and its citizens.
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The “free house” myth is merely a PR bank statement to deflect from a “free loan” and “free money” and “free foreclosures.”
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